Topic

Venture capital financing

REPRESENTED BY
YAMINEE KAUSHIK
MBA 4th sem.
Word meaning of venture capital

“Venture” is a course of processing, the

outcome of which is uncertain but to which
is attended the risk or danger of “loss”.
“capital” means resources to start
enterprises.
To connote the risk and adventure of such
a fund, the generic name venture capital
was coined.
What Does Venture Capital
Mean ?

Private financing used to fund a new

business; in other words, money
provided by investors to start-up firms
and small businesses with perceived
long-term growth potential. This is a
very important source of funding for
start-ups that do not have access to
capital markets. It typically entails
high risk for the investor, but it has
the potential for above-average
returns.
Definitions of venture capital
 'providing seed, start-up
and first stage financing'
and also 'funding the
expansion of companies
that have already
demonstrated their business
potential but do not yet
have access to the public
securities market or to
credit oriented institutional
funding sources.
Jane Koloski Morris
 it as risk finance for
entrepreneurial growth
oriented companies. It is
investment for the medium
or long term return seeking
to maximize medium or
long term for both parties.
It is a partnership with the
entrepreneur in which the
investor can add value to
the company because of his
knowledge, experience and
contact base.
The European Venture
Capital Association
 definition

A fund raising technique for companies who are

willing to exchange equity in the company in return
for money to grow or expand the business. A
venture capitalist differs from an angel investor in
terms of wanting greater control of company and
quicker return on investment .

Also Known As: VC or Risk Capital or venture

capitalist
 Features of venture capital

 high risk ---management risk, market risk,

product risk, operational risk
 high technology---
 equity participation and capital gains
 participation in management
 length of investment
 illiquid investment
applications of venture Capital

 New business establishment

 Growth
 Diversification
 For adopting expansion plan
 process of venture capital
 deal origination - Referral system, active search system, and
intermediaries

 screening -VCFs, before going for an in-depth analysis, carry out

initial screening of all projects on the basis of some broad criteria

 Evaluation of due diligence –

Preliminary evaluation: The applicant required to provide a brief

profile of the proposed venture to establish prima facie eligibility.

Detailed evaluation: Once the preliminary evaluation is over, the

proposal is evaluated in greater detail. VCFs in India expect the
entrepreneur to have:- Integrity, long-term vision, urge to grow,
managerial skills, commercial orientation.
process of venture capital


Deal structuring - venture capitalist and the venture
company negotiate the terms of the deals, that is, the amount,
form and price of the investment. The agreement also include
the venture capitalist's right to control the venture company
and to change its management if needed, buyback
arrangements, acquisition, making initial public offerings
(IPOs), etc. Earned out arrangements specify the
entrequreneur's equity share and the objectives to be achieved.
process of venture capital

Post investment activities - Once the deal has been
structured and agreement finalized, the venture capitalist
generally assumes the role of a partner and collaborator. He

also gets involved in shaping of the direction of the venture.


exit - A venture may exit in one of the following ways:

1. Initial Public Offerings (IPOs)

2. Acquisition by another company
3. Purchase of the venture capitalist's shares by the promoter,
4. Purchase of the venture capitalist's share by an outsider.
 Benefits of venture capital
 Mentoring
 Alliances
 Facilitate exit
 It allows entrepreneurs to build their company with OPM (other
people's money).
 Owner ship
 Venture capital funds identify their own investment opportunities.
 The valuable skills, contacts and experience to right business angels
and venture capitalists can bring your business and can assist with
strategy and key decision making.
disadvantages of venture capital

 Depending on the investor, venture company will

lose a certain amount of its power to make
management decisions.

 Venture company will have to invest management

time to provide regular information for the
investor to monitor.
 Disadvantages of venture capital
continued

 Intrusion - Venture capitalists are more likely to want to

influence the strategic direction of the company.

 Control - Venture capitalists are more likely to be interested in

taking control of the company if the management is unable to
drive the business.
Venture capitalists typically invest
in businesses with:

 an ambitious but realistic business plan

 a product or service that offers a unique selling point
or other competitive advantage
 a large earning potential and a high return on
investment within a specific timeframe, e.g. five years
 sound management expertise - although VCs tend not
to get involved in the day-to-day running of the
business, they often help with a business' strategy
 a proven track record - for this reason, VC's generally
do not consider start-ups for investment
Types of Venture Capital Funds

 VCFs promoted by the Central govt. controlled

development financial institutions -
 VCFs promoted by the state government-controlled
development finance institutions
 VCFs promoted by Public Sector banks
 VCFs promoted by the foreign banks or private sector
companies and financial institutions
 pre-requisites of venture capital

 Strong management
 A growing market
 A unique product
 IPO candidate or acquisition target
 Sound business plan
 Significant gross profit margins
pre-requisites of venture capital
continued

 Gather information
 Get an introduction
 Be prepared --- A clear understanding of your business, A
clear understanding of the barriers to entry and other hurdles
of business, Drive and ambition, Relevant experience, A vision
for the growth of the company, The character, expertise,
experience, and skills of key members of the management
team
A Case on Technology Development &
Information Company of India Ltd.

TDICI was incorporated in January 1988 with the

support of the ICICI and the UTI. The first project of
the TDICI was loan and equity to a computer
software company called Kale Consultants.
 Some of the projects financed
by the TDICI

 MASTEK - a Mumbai based software firm, in which the TDICI

invested Rs.42 lakh in equity in 1989, went public just three
years later, in November 1992. It showed an annual growth of
70-80 percent in the turnover.

 TEMPTATION FOODS - located in PUNE, which exports frozen

vegetables and fruits, went public in November 1992. The
TDICI invested Rs.50 lakh in its equity
 Some of the projects financed
by the TDICI


RISHABH INSTRUMENTS - of Nasik got Rs.40 lakh from the
TDICI. It manufactures a range of meters used in power
stations in collaboration with the ABB Metra Watt of Germany.
After making cash losses totaling Rs.25 lakh in two bad years, it
turned around in 1989 and showed an increase of over 70
percent in the turnover.

 SYNERGY ART FOUNDATION - which runs art galleries in

Mumbai and Chennai and plans to set up in Pune and Delhi too,
had received Rs.25 lakh from the TDICI as convertible loans
which were converted into equity on March 31, 1994.
 conclusion

In nutshell, In recent years the growth of Venture Capital

Business has been drastically decreasing due to many
reasons. The regulator has to liberalize the stringent
policies and pave the way to the venture capital investors
to park their funds in most profitable ventures. Though an
attempt was also made to raise funds from the public and
fund new ventures, the venture capitalists had hardly any
impact on the economic scenario for the next few years. At
present many investments of venture capitalists in India
remain on paper as they do not have any means of exit.
Appropriate changes have to be made to the existing
systems in order that venture capitalists find it easier to
realize their investments after holding on to them for a
certain period of time.
 References

 www.wikipedia.org
 Taneja Satish, venture capital in India, Galgotia
publishing company
 www.citeman.com
 www.managementparadise.com
Thanks you